Czech Inflation Slowdown Bolsters Calls for Koruna Sales

Czech inflation unexpectedly slowed for a second month in August, slipping further below the central bank’s target and bolstering the arguments of board members who want to ease policy by selling koruna.

The Inflation rate dropped to 1.3 percent from 1.4 percent in July, the Czech Statistics Office said today in a statement. That’s less than the 1.4 percent median estimate in a Bloomberg survey of 15 analysts and lower than the central bank’s 1.6 percent forecast. Consumer prices fell 0.2 percent from July.

After three rate cuts exhausted room for traditional monetary easing last year, policy makers in Prague are debating whether price growth below their 2 percent target warrants the first currency interventions since 2002. Rate setters are assessing the strength of a rebound after the economy exited a year-and-a-half long recession in the second quarter.

“Inflation itself is an argument for further easing monetary conditions,” Radomir Jac, chief analyst at Generali PPF Asset Management AS, said today by e-mail. “But the bunch of recent data from the Czech economy, for instance GDP, industrial orders, retail sales and the manufacturing PMI, have provided arguments for the non-interventionist camp.”

Jac said he didn’t expect the central bank to start koruna sales at its next policy meeting on Sept. 26.

Koruna Weakens

The koruna has depreciated 2.8 percent against the euro this year and traded 0.1 percent lower at 25.812 per euro as of 1:31 p.m. in Prague, according to data compiled by Bloomberg. The currency has moved to the center of policy deliberations because depreciation would make imports more expensive and boost the competitiveness of exports, curbing deflation risks.

The Ceska Narodni Banka left its main interest rate unchanged for a sixth meeting on Aug. 1 at what it calls a “technical zero” of 0.05 percent, almost half a point below the European Central Bank’s benchmark.

At its last meeting, the Czech central bank’s seven-member board voted for the first time on whether to start koruna sales, the bank said, without disclosing the breakdown of the ballot.

Price growth relevant to monetary policy and adjusted for the primary effect of changes in indirect taxes slowed to 0.5 percent in August from 0.7 percent the previous month. It stayed below the central bank’s 1 percent to 3 percent tolerance band, the bank said today in a statement.

Growth Returns

While the return of economic growth is a good signal, it isn’t a clear confirmation of a turnaround and undershooting the inflation target “may be a problem,” board member Lubomir Lizal said in an interview with the E15 newspaper published Sept. 2. Looser monetary conditions are needed as the koruna is overvalued compared with the central bank’s forecast, he said.

Even as most policy makers agreed in August that the probability of starting the interventions has increased, some argued doing so may destabilize the economy, according to the minutes from the meeting, which don’t disclose individual members’ views. Governor Miroslav Singer spoke in favor of further policy easing before the last policy meeting.

“The next central bank meeting at the end of the month is going to be very interesting and suspenseful,” Martin Lobotka, an analyst at Ceska Sporitelna AS in Prague, said today in a note to clients. “We have better data from the real economy and optimistic leading indicators. On the other hand, there’s an environment that’s totally devoid of any inflationary pressures.”

While a majority of board members will probably oppose starting koruna sales in September, a gain in the currency to 25.5 per euro or a slowdown in inflation to 1 percent would increase the chances of foreign-exchange intervention, he said.

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